American Eagle expects strong holiday earnings but lower margins

(Reuters) - American Eagle Outfitters Inc (AEO.N) on Wednesday joined other U.S. apparel makers in forecasting strong earnings for the key holiday selling season but said it expected lower profit margins compared with a year earlier.

FILE PHOTO: Jeans are seen for sale in an American Eagle Outfitters retail store in Manhattan, New York, U.S., May 13, 2016. REUTERS/Mike Segar/File Photo

Shares of American Eagle rose more than 5 percent to $16.99 in early trading but gave up most gains after the company gave the gross margin forecast on a call with analysts.

“We expect markdowns in promotional environment to remain pretty consistent with last year, which is what we’ve seen in the beginning of the holiday season thus far,” Chief Financial Officer Robert Madore said.

Madore’s remarks signaled the company might be as aggressive on promotions as it was last December in the aftermath of Aeropostale’s bankruptcy, when it sought to keep shoppers from flocking toward heavily discounted Aeropostale apparel.

American Eagle’s gross margin - gross profit as a share of revenue - fell 1.2 percentage points to 39 percent in the third quarter ended Oct. 28, hurt by higher warehousing and shipping costs on online orders as well as more promotions.

Still, American Eagle delivered third-quarter earnings and comparable sales ahead of Wall Street targets, driven by robust demand for its Aerie line of lingerie as well as surprisingly strong sales for its namesake brand.

Aerie has driven much of the company’s growth in recent quarters. Comparable sales from the brand rose 19 percent in the latest quarter, while those for American Eagle inched up 1 percent, reversing several quarters of declines.

Recent sales at American Eagle have also been driven by newer trends in women’s jeans, helping the company maintain an enviable 33 percent share of the U.S. denim market for young shoppers.

The company expects earnings of 42 to 44 cents per share for the holiday quarter ending January, better than analysts’ average expectation of 39 cents, according to Thomson Reuters I/B/E/S.

“Considering that the lagging men’s category finally flipped to positive in 3Q17 after several quarters of being a drag, we expect that the outlook could prove conservative,” RBC Capital Markets analyst Brian Tunick said.

Last month, Gap Inc (GPS.N) and Abercrombie & Fitch (ANF.N) also forecast strong holiday-quarter earnings, driven by demand for their Old Navy and Hollister apparel, respectively.

American Eagle’s net income fell 16 percent to $63.7 million, bruised by promotions and a $14 million charge. Excluding one-time items, the company earned 42 cents per share, topping analysts’ estimate of 38 cents.